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June 7, 2012

Spain Auction Beats Target

Although yields were at a high not seen since November, Spain exceeded its target at a Thursday bond sale, easing fears that financial markets were closed to the country—as its budget minister had said on Tuesday.

As the U.K. called for banking safeguards, Chancellor Angela Merkel of Germany pushed for a two-speed Europe, with core eurozone countries implementing closer financial integration and excluding non-euro and peripheral nations. In Asia, China acted against an increasing economic slowdown by cutting interest rates for the first time since 2008.

Bloomberg reported Thursday that, despite the concerns voiced by Budget Minister Cristobal Montoro on Tuesday that the “door of the markets isn’t open to Spain,” Madrid saw high demand for its bonds. The Spanish treasury had set a target of 2 billion euros ($2.5 billion), and handily achieved it, with demand at 3.29 times the amount sold.

Yield was 6.044% on the 10-year benchmark bond, which was the highest since November 17 when secondary market demands boosted it to a euro-era record 6.78%. However, results were “pretty decent overall and the market appears eminently comfortable with the outcome,” according to John Davies, a fixed-income strategist at WestLB in London quoted in the report. “A tad above the top end of the target volume range obviously looks good, but I think the more encouraging factor was that the 2022 bond came at 6.04%, so safely below levels prevailing in the secondary market.”

George Osborne, the U.K.’s finance minister, said in a Reuters report that Britain would want safeguards to secure its own financial industry should the eurozone take action to establish a banking union.

"There is no way that Britain is going to be part of any eurozone banking union," he was quoted saying. "I think Britain will require certain safeguards if there is a full-blown banking union." Since Britain is not part of the joint currency, its economic pronouncements are not always embraced by the eurozone, despite the fact that it depends on the group for much of its economic well-being.

Merkel, however, said prior to a scheduled meeting with Prime Minister David Cameron of Britain that she supports a two-speed European Union, with peripheral countries—and non-eurozone members like Britain—outside the core group of countries that would pursue closer financial integration. In an indirect slam at Cameron, she said such a thing already exists. She pointed to the Schengen agreement, which abolished border controls between some European countries and the monetary union that excludes the U.K. and Denmark, and was quoted in a Bloomberg report saying, “This will be intensified.”

“Those in a monetary union will have to move closer together,” she said in an interview with the German public broadcaster ARD. “We have to be open. We always have to make it possible for everyone” to join. “But we must not stop because one or the other don’t want to come along just yet.”

Osborne had referred to additional protection for the City of London financial district as he criticized the eurozone’s methods of financial control and rescue, particularly with regard to Spain’s current crisis. He was quoted saying, "When [the eurozone] created the rather clumsily titled EFSF [European Financial Stability Facility], this eurozone bailout fund, one of the things it was able to do and its successor, the equally clumsily called ESM [European Stability Mechanism], what these funds are able to do is support eurozone banking systems. So we need to make sure that the mechanisms already put in place can be activated."

He added, "The banks have been one of the weak links in all of this and the eurozone have tolerated weak, undercapitalized banks for too long."

Merkel, on the other hand, is determined that if closer financial integration is to occur in the eurozone, other countries must allow themselves to be ruled by Brussels. She said, “We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy. And we need most of all a political union, that means we need to gradually give competencies to Europe and give Europe control.”

With these two at loggerheads, any fiscal union will not come easily. Fredrik Erixon, head of the European Center for International Political Economy in Brussels, was quoted saying, “The economic and political division between the Anglo- Saxon world and the ‘Germanosphere’ is increasing.”

As the crisis grinds on, continuing to take its toll on China’s booming economy, the central bank took the major step of lowering interest rates for the first time since 2008. The People’s Bank of China (PBOC) said that as of Friday, the 3.5% one-year deposit rate will fall to 3.25%.

The one-year lending rate will drop to 6.31% from 6.56%, and banks will be permitted to offer a 20% percent discount to the benchmark lending rate. Previously the limit was 10%.

Sun Junwei, a Beijing-based economist with HSBC Holdings, said in the report, prior to PBOC’s action, “This shows the government is speeding up and strengthening its policy stimulus, which is key to stabilizing China’s growth. The downside risks to growth continue to pose serious challenges to the Chinese economy, outweighing inflation as the top concern for policymakers.”

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